Real Estate & Escrow Terms Explained – (Part Two!)
If you’ve made your way through Part One of this real estate glossary, you’re well on your way to being a real estate terminology expert! But…once you, as the buyer or seller, have successfully negotiated a contract for a property, that property is now “in escrow.”
As confusing as real estate terminology can be, escrow related words and phrases can be even more overwhelming. The following are some common escrow terms to help you as you navigate the escrow process.
Escrow – Escrow is the deposit of money and documents with a neutral third party who will secure the items until all conditions are met for the transfer of the property. In Arizona, independent licensed escrow and title companies perform all the steps necessary for the escrow process.
Title – Put simply, title is evidence of a person’s right of ownership, or the extent of his/her interest, in a property. The manner in which title is held is extremely important and will have certain legal and tax consequences. Parties may choose to hold title in the name of an entity such as a corporation or trust, or they can choose to hold title as individuals or couples/joint tenants.
Since Arizona is a community property state, the two most common ways to take title are Community Property with Right of Survivorship and Joint Tenancy With Right of Survivorship.
Community Property with Right of Survivorship – This involves a legally married couple. Each spouse holds one-half interest in the estate. One spouse cannot sell his or her interest in the property and both spouses must agree if the property is to be sold. The advantage of this type of title is that upon the death of one spouse, the estate passes to the surviving spouse without going through probate.
Joint Tenancy With Right of Survivorship – In this case the parties do not need to be married and there can be more than two joint tenants. Each joint tenant holds an equal interest. One joint tenant can partition the property by selling their joint interest. At the death of one joint tenant, the estate passes to the surviving joint tenants without going through probate.
Title Search – The title company will perform a Title Search to ensure there are no encumbrances or liens against the property and to verify the seller’s legal ownership. This involves researching the Chain of Title, which is the sequence of ownership records. The title search will ensure that the sellers have the legal right to transfer the property to the buyers.
Title Insurance – This is a one-time insurance premium paid by both buyers and sellers. There are two types of title insurance: an Owner’s Policy and a Lender’s Policy. The Owner’s Policy is paid by the seller of the property and protects against title defects, liens & encumbrances up to the amount of the purchase price. The Lender’s Policy is paid by the buyer and serves to protect the lender up to the amount of the buyer’s loan.
Preliminary Title Report – This is a document issued by the title company after they complete a search of the public records available. It will include a legal description of the property, the names of the parties holding title to the property, the amounts and payment status of taxes, recorded documents including the Covenants, Conditions and Restrictions (CCRs) and will list any encumbrances against the property.
Encumbrance – An Encumbrance is a claim against a property by a party other than the owner. Property taxes and mortgages are the most common kinds of encumbrances against a property. The title company will pay any outstanding mortgage amount or property taxes owed from the seller’s proceeds at closing. Another type of encumbrance is a Lien. A lien is a burden against the property related to the payment of a debt. A common type of lien is a Mechanic’s Lien. Contractors may file a Mechanic’s lien against a property for the seller’s failure to pay for a service provided. As with other encumbrances, the title company will ensure that all liens are paid in full by the seller, prior to the transfer of the property.
Impounds – This is an account set up by the buyer’s lender to hold monies for prepaid taxes and insurance premiums. The lender will collect funds each month on top of the regular mortgage payments to hold in this account. The lender will draw funds from the account as tax and insurance payments become due and issue payments on behalf of the borrower.
Prorations – Some property expenses such as property taxes are due at various intervals. To compensate for these irregular payment intervals, the escrow company will calculate adjustments called prorations. These prorated amounts are to ensure that each party is responsible for these expenses only during their actual period of ownership. The escrow company will calculate the daily or per diem amount of the expense. The seller will cover expenses up to the last day of ownership and the buyer assumes the expenses on the day of closing and forward.
Deed – There are several types of deeds used in the course of a real estate transaction. The two most common are the Warranty Deed and the Deed of Trust.
The Warranty Deed conveys or transfers ownership of a property from one party to another (from the seller to the buyer). When a buyer uses a loan to purchase a property, the Deed of Trust secures the interest of the mortgage lender, effectively making the property collateral for the loan. These deeds are legal instruments and are recorded at the county.
Note – This is the document that establishes the debt to the lender who is the beneficiary. The note will state the principle amount borrowed, the rate of interest, and maturity date of the loan, etc. By signing the note, the borrower promises to repay the debt according to the terms set forth in the note. The note is secured by the Deed of Trust.
Settlement Statement – This is a form provided by the escrow company that itemizes all the costs of the escrow. This statement is provided to both the buyer and seller. At the bottom of the statement the seller will see the net amount they will receive from the sale, and the buyer will see the amount of money they will need to bring to the closing.
Recording – Recording is the process of filing the documents at the County Recorder’s office making the documents part of the public record. When the documents are recorded, the official Close of Escrow has occurred. The buyer is now officially the owner of the property.
Contact The Donnelly Group!
By now you may be either thoroughly confused, or ready to take the real estate license exam! If you hire an experienced Realtor® they will help you navigate your way through the entire home buying or selling process. Your Realtor® can then introduce you to their trusted Title & Escrow partners who are the true experts you will need in the latter stages of the process.
So you don’t need to know these terms – there won’t be a quiz – but we do like our clients to be informed and educated about the process they are involved with.
If you have any questions at all, or need help buying or selling a home in metro Phoenix, please feel free to contact the Donnelly Group at 480-792-9700 or by email.
